Levine on Wall Street: Twitter IPO Leverage

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Here's a Wall Street Journal story about how hedge funds use Freedom of Information Act requests to get information from the U.S. government about things like drug approvals, which they then use to inform their investing strategies. "Such requests are perfectly legal" but the article is full of raised eyebrows. Ehhhhhhhhhhh. Some investors do better research than other investors, including filing clever FOIA requests, and as a reward they get better information and, one hopes, make more money. The financial markets are not a "level playing field" -- in the sense that everyone has the same chance as anyone else -- any more than, I dunno, actual sports are. Recent insider-trading crackdowns might obscure that but don't let them. People who are good at getting information will get more information than people who are not good at getting information, wherever you set the line on what information is and is not legal to get.

Apparently "US equity funds recommended by consultants underperformed other funds by 1.1 per cent a year between 1999 and 2011, according to analysis of 29 consultancies accounting for more than 90 per cent of the market by a team from Oxford university's Sa&#xEF;d Business School." Picking funds is about as difficult as picking stocks; if investment consultants could actually predict which funds would outperform then presumably they wouldn't be investment consultants. Or that's the clich&#xE9;, anyway; in fact the field seems to be pretty lucrative.

Here's a Financial Times story about how Twitter is talking to banks about a new $500+ million credit facility in advance of its initial public offering. The paper notes that Facebook and Zynga raised billions in bank financing before their IPOs, and that companies planning IPOs "have more leverage to request a credit line than they would have when staying private, because banks are eager to win a position in the IPO." That's an understatement. High-profile internet IPOs are so valuable for advertising, branding and allocating hot shares to favorite investor clients that investment banks would probably do them for free. Except that fee precedents are important: If you're a bank, you can't do a big IPO for free for fear that the next, smaller IPO will demand the same terms. So you charge a fee that's in line with precedents and make the package deal cheaper in other ways, for instance with a below-market credit facility. Or, y'know, whatever the client wants. If you ever need someone killed, consider taking a social media company public.

The Securities and Exchange Commission is coming after a father-son team of ... let's say for argument's sake scammers ... for taking advantage of the fine print in some bonds. There are some bonds, see, frequently issued by insurance companies, that you can buy at a steep discount and then redeem for 100 cents on the dollar if you die. That is, your survivors can redeem them. Benamin S. and Benjamin O. Staples found a bunch of terminally ill patients and agreed to pay their funeral expenses in exchange for, basically, renting their names and social security numbers to buy those bonds. The patients died, the Stapleses redeemed the bonds, and they made $6.5 million in profit. Now the SEC wants them to pay it back. The SEC's complaint suggests that they basically got their documents wrong: The terminally ill patients assigned the Stapleses all of their rights in the bonds, but the redemption papers required the patients to have owned the bonds at their death. This seems like it could have been avoided -- the Stapleses buy the bonds for the patients, the patients own the bonds subject to transfer restrictions with the Stapleses as designated beneficiaries, etc. -- but you get the sense that the SEC wouldn't be happy even if they'd gotten the documents right.

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Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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